Coca-Cola to buy Glaceau for $4.1 billion

Buyout of Vitaminwater maker to boost earnings in first full year

By

WilliamSpain

SarahTurner

NEW YORK (MarketWatch) -- Coca-Cola Co. said Friday it agreed to acquire Energy Brands Inc., also known as Glaceau, for $4.1 billion in cash, in a move to boost its presence in the fast-growing "enhanced-water" and energy-drink markets.

The blue-chip bottler
KO, +1.28%
will acquire the full range of privately held Energy Brands' products, including Vitaminwater, Smartwater, Fruitwater and Vitaminenergy.

The deal is expected to add to Coca-Cola's earnings per share in the first full year following completion, while nipping 1 cent to 2 cents off this year's profit. The deal has been approved by the boards of both companies but is still subject to regulatory review.

Shares of Coca-Cola traded up 1.3% to close at $51.89.

"Glaceau has built a great business with high-quality growth, as well as a strong pipeline of innovative products and brands," Coca-Cola Chairman and Chief Executive Neville Isdell said in a statement.

The acquisition will provide Coca-Cola with a strong foundation from which to develop "active-lifestyle beverages," the company said, adding that the Glaceau deal's likely to bring "immediate, high-quality growth."

As sales of carbonated soft drinks have sagged, the Atlanta-based beverage behemoth has been trying hard to develop or acquire water, tea and juices as well as energy- and sports-drink brands.

While still dominant over rival PepsiCo
PEP, -0.29%
in the carbonated arena, PepsiCo has beaten Coke for years in anything that doesn't fizz. Both have been buying up some smaller companies -- notably, Pepsi's purchase of SoBe and Coke's recent acquisition of Fuze.

Coca-Cola said the deal "sharpens even further our existing focus on re-establishing sustainable growth in our home market, strengthening our system, and leveraging acquisition opportunities to gain speed and capabilities in key categories," said Muhtar Kent, Coca-Cola's president and chief operating officer.

Glaceau holds the leading position in "enhanced water," a market expected to make up a large portion of the beverage industry's growth in volume and gross profit in North America through 2010, Coca-Cola said.

Morningstar analyst Matthew Reilly noted that "although the price is not cheap, we see the transaction as positive; Glaceau's brands like Vitaminwater will greatly enhance Coke's North American noncarbonated beverage offerings, which have been glaringly weak over the past few years."

The category is growing rapidly, he continued, and "will benefit from greater distribution as part of the Coke system, especially as international expansion is contemplated. We also think the brand will provide Coke with an innovation platform that could help it capitalize on health and wellness trends, as well as bolster its tarnished public image as a purveyor of unhealthy offerings."

One analyst's 'question mark'

The deal also gives Coca-Cola further international opportunities, noted Isdell, saying the company "looks forward to taking Glaceau brands to other key markets around the world."

Coke will acquire about 70% of the company next month. Separately, Tata Tea will sell its 30% stake in Energy Brands to the company for about $1.2 billion, a deal that should close in November.

Whitestone, N.Y.-based Glaceau will operate as a separate business unit within Coca-Cola North America. Its top three executives intend to lead the business for a minimum of three years, with other key managers also remaining with the business.

"We envision even faster growth for Glaceau as part of Coca-Cola's enhanced range of brands for North American customers and consumers," Isdell said.

Faucher sees the deal as a "question mark" for Coke, writing in a note to investors: "We think [the company] will need to prove it is beneficial to its shareholders to spend $4 billion for the latest 'hot' beverage brand."

Further, "the deal makes sense strategically for the Coke system as a whole in North America, but [we] worry about the price tag. Vitaminwater ... would allow the company to compete more effectively against Pepsi's Gatorade and Propel businesses, categories where Coke has struggled to gain traction."

By the same token, "we do have some concerns about the implications ... given the lofty purchase price, the potential split of system profits, and the beverage industry's checkered past in terms of overpaying for trendy beverage brands that don't quite live up to initial expectations."

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